Papa John's International Inc (PZZA) 2005 Q3 法說會逐字稿

Good Morning. My name is Deshanta, and I will be your conference facilitator today. At this time, I would like to welcome everyone to the Papa John's Third Quarter 2005 Earnings Conference Call. (Operator Instructions). Mr. Flanery, you may begin your conference.

Thank you, Deshanta. Good morning. With me on the call today are our CEO and President, Nigel Travis, our Executive Chairman, John Schnatter, Chief Operations Officer, Bill Van Epps, and other members of our executive management team. After a brief financial update, Nigel will have a few comments about our general business trends and strategic initiatives. The management team will then be available for Q&A.

Our discussion today will contain forward looking statements that involve risks and uncertainties relating to future events. Actual events may differ materially from the projections discussed today. The call is being taped, and the replay will be available for a limited time on our website.

All of the financial results we will discuss are prior to the impact of the consolidation of the BIBP cheese purchasing entity. The BIBP consolidation increased third quarter 2005 earnings per share by $0.11 and reduced the third quarter 2004 earnings per share by $0.02. Excluding BIBP, current year EPS for the quarter was $0.51, as compared to $0.48 for the prior year.

These third quarter results included approximately $2.3 million, or $0.08 of costs related to three specific items worthy of note. First, we invested $1.7 million in consulting costs related to a group of marketing initiatives that Nigel will discuss in more detail in his remarks. Second, excluding any impact from lost royalties and commissary sales, we incurred $300,000 of incremental costs for donated food products and related costs associated with our hurricane relief efforts during the quarter. Finally, we incurred over $300,000 of incremental costs related to an equity-based compensation program that I will discuss in more detail later in my remarks.

One other item specifically impacting Q3 earnings is the increase in share count attributable to our increasing stock price during the quarter that triggered both increased option exercises and an increase in the dilutive impact of the remaining outstanding options. I will discuss our fourth quarter share repurchase plans and activity to date in order to address the share count increase in a moment.

Our third quarter financial results were driven by strong sales for the quarter, as company-owned restaurants led the way with an 8.7% comparable sales increase, and franchise units recorded a solid 2.3% increase for a domestic system-wide increase of 3.9%. Interestingly, we believe the June implementation of a delivery charge by the majority of company-owned units actually led to increased comparable transactions during Q3, largely due to the flexibility the charge affords our operators in pricing and bundling promotions.

The strong sales results produced improved profitability in both of our domestic restaurant business segments. Company-owned restaurants' pretax income for third quarter increased $5.2 million on a year over year basis while domestic franchising increased $500,000. Operating results for our domestic commissaries business unit also increased $600,000 in the third quarter of 2005 over the same period in 2004 due to improved operating margins and lower administrative costs, partially offset by higher fuel costs and the donated product and associated costs related to hurricane relief efforts.

Total system-wide international sales increased 12.4% for the third quarter, and operating results for the international business unit decreased $800,000 as compared to the same period in 2004, primarily as a result of declining performance for the Perfect Pizza branded units in the United Kingdom, and we are assessing our UK alternatives at this time. We also would like to note that we do not expect increasing contributions to operating income from international in the near term, reflecting our commitment to invest for long-term international growth, as Nigel will discuss in more detail in his remarks.

The increases driven by our most significant business units as noted were partially offset by an increase in unallocated corporate expenses, primarily increased incentives and equity compensation charges and certain benefits and consulting costs. One item worth specific explanation for the quarter is our Performance Unit Program for senior management. This program provides cash payments to senior management based upon the total return on Papa John's stock as compared to a peer group of restaurant companies over a three-year performance period.

As a result of the significant increase in our stock price during the quarter, from just under $40 per share at the end of June to over $48 per share at the end of September, the estimated total three-year cost of the Performance Unit Program increased approximately $2 million, requiring a $675,000 charge during the quarter, of which $335,000 related to the catch-up adjustment for prior periods.

Cash flow from operations for the first nine months of 2005 increased approximately $20 million, as compared to the first nine months of 2004, driven by a combination of the strong 2005 operating results and favorable changes in working capital. A result of this strong cash flow was a reduction in our line of credit borrowings from $78.5 million at the end of 2004 to $36 million at the end of September 2005.

We repurchased approximately 481,000 shares of stock during the third quarter. Also, in response to the increase in our share price throughout Q3, approximately 569,000 shares were issued pursuant to option exercises during the quarter. We have continued our share repurchase program subsequent to Q3, having acquired an additional 476,000 shares in October and the first week of our November reporting period. We have $18.7 million of remaining share repurchase authorization through the end of the year, and we continue to believe share repurchase may be an appropriate use of our free cash flow, particularly to offset the dilutive impact of stock option exercises.

We also announced the continuation of our solid 2005 domestic comparable sales trends in October, reporting a system-wide increase of 5.9% with an especially strong 10.3% increase for company-owned units and a 4.7% increase for franchise units. The majority of the increase for company-owned units was attributable to traffic, while the franchise units did not see similar traffic increases in October. Total international sales increased 13.6% in October on a constant US dollar basis.

Based upon the strong results for Q3, we have raised the lower end of our earnings guidance for the year. Our new guidance range of $2.44 to $2.48 per share represents an implied fourth quarter earnings range of $0.64 to $0.68 per share. This fourth quarter guidance includes the impact of an expected charge of $1.7 million, or $0.06 per share, related to a discretionary contribution to the National Marketing Fund to support additional fourth quarter television slots to build upon the momentum of the launch of Papa's Perfect Pan Pizza.

We have provided our routine quarterly update of the expected impact of the consolidation of BIBP for the remainder of 2005 and full year 2006. Pretax income is expected to increase approximately 4.6 million in 2005 and $9.3 million in 2006 from the consolidation of BIBP.

Overall, we are very pleased with the third quarter and year-to-date results, and we are confident we can maintain our momentum throughout the remainder of the year. I'd now like to turn the call over to Nigel Travis, our President and CEO. Nigel?

David, thank you very much, and good morning everyone. As David said, we're extremely pleased with both our third quarter and year-to-date results. As he noted, our very solid 3.9% comparable sales increases for the quarter produced operating income improvements in our corporate restaurants, our franchise, and commissary business units, and we're delighted, really delighted, with the results of our Papa's Perfect Pan Pizza product launch in October, as evidenced by the 5.9% comparable sales increases for the period. And early November results indicate the momentum of our product launch is continuing.

An important heritage for Papa John's is our reputation for delivering quality products and service, and this is a subject on which I expect absolutely no compromise. In the quarter, we once again won the Restaurants and Institutions Choice in Chains award among national takeout and delivery pizza chains, and I believe what was even more satisfying were our leading scores in the categories of food quality, service and overall impression.

In looking at our financial results, it's important to management and our shareholders that we strike the proper balance between the current financial performance and investment spending to drive growth in future periods. We believe our third quarter results and our fourth quarter projections demonstrate our commitment to this balance. In addition to overcoming lost revenues and incremental costs related to the impacts of Hurricanes Katrina and Rita in Q3, we continue to investment spend on certain marketing initiatives and on programs designed to improve the performance of our franchisees, and I'll discuss these more fully in a moment.

Before I address our significant opportunities and challenges in more detail, I'd like to take a moment to recognize the efforts of our Papa John's corporate and franchise team members in responding to the devastation along the Gulf Coast during the third quarter and, more recently, to the situation along both coasts of Florida as a result of Hurricane Wilma. Through giving both of their time and of their financial resources, our Papa John's team has made a significant positive impact on the lives of evacuees, relief workers, and those residents working to restore their communities. We have provided more than 100,000 meals and total product and cash contributions exceeding $1 million to those impacted by the storms. We've also established a franchise team member relief fund to aid employees impacted by these storms and future disasters. During this difficult period, I have been very proud of our team and their achievements.

Now, returning to our third quarter performance. We were especially pleased with the continued trend in transactions, particularly in our corporate units. The majority of the increase in comparable sales for our corporate restaurants was the result of increased orders in Q3, and this trend continued in October, while the majority of the increase for franchise units was ticket average in both periods. However, our early November results show improved transactions on both sides of the business as we continue to focus on driving profitable transactions in our restaurants.

The transition to our consolidated operations management structure is progressing as planned. While we have many outstanding franchisees that execute our programs and service their customers as well or better than our corporate units, the consistency of this performance level throughout the franchise system needs improvement. We believe that our new operations management structure will be more effective in providing support and guidance to our franchisees, thus enabling franchise performance to trend more closely with corporate unit performance on a consistent basis.

One factor that negatively impacts the overall performance of our franchisees is the number of markets where we are under-penetrated and, therefore, lack brand awareness. Many of these markets are progressing as we would expect. However, there are certain markets where our existing franchisees may lack the capital to continue the development of the market at the pace necessary to produce improved sales and financial results. We're in the process of developing marketing, development, and operational plans to tackle these issues and expect announcements in the next several months that will demonstrate our progress.

For example, we've developed a buy and build strategy that we believe will help to accelerate the development of certain under-penetrated markets. We've begun the execution of this strategy in the Philadelphia market by acquiring seven franchise restaurants subsequent to the end of the third quarter. We're looking to consolidate additional franchise units in this market as the opportunity arises, and we expect to build 20 or more corporate stores over the next two or three years. If successful in the Philadelphia market, we will plan to pursue this strategy in other under-penetrated markets over time.

We will continue to develop and implement initiatives to drive operating performance throughout the system and especially in our underperforming markets. The best way to improve financial performance is to focus on top line sales growth, and we believe our new product strategy has been a major reason for our strong 2005 results to date.

Our Papa's Perfect Pan Pizza launch has generated tremendous excitement throughout the Papa John's system. And by teaming with Hall of Fame Quarterback Dan Marino to challenge consumers to "Go deep with Papa's Perfect Pan," we've obtained substantial PR coverage to enhance our overall marketing efforts towards the product launch.

We previously announced an increase in the contributions to our National Marketing Fund for 2006 from this year's 2.25% to next year's 2.6% of sales, providing an increased ability to run national television slots. This should benefit our under-penetrated markets even more than the rest of the system since these are the markets least able to afford local market television. Additionally, to ensure the continued momentum of Papa's Perfect Pan, we're making a fourth quarter discretionary contribution of 1.7 million into the National Marketing Fund to provide additional national television during the quarter.

Another area where we're investing significant time and money is the enhancement of our database capabilities. We have incredible amounts of information regarding our customers and their purchasing habits, but we've not taken full advantage of this information to better connect with our customers to drive both loyalty and order frequency. We're still in the early stages of this group of initiatives, but we're encouraged by the results to date. I know from my days at Blockbuster that given the data, the right systems, and appropriate targeting, these initiatives can drive returns on investments of several hundred percent.

Another area producing exciting results for us is our online ordering system. The percentage of total orders being placed online continues to grow, and the online ticket average constantly exceeds that of phone orders. We continue to improve the customer experience with our online system. For example, we can now offer "Plan Ahead". That means you can actually order your pizza at a certain time several days ahead, or we also have "Repeat Last Order." We're only beginning to actively market our online system, an example of which is the recent sponsorship of the Wednesday night poll on ESPN.com. So we anticipate continued growth in the percentage of our business coming through our online system as we more actively market and drive consumer awareness of our capabilities.

I'd like to turn now to our international business. We continue to make progress on the development of the Papa John's brand in the United Kingdom, and we'll focus on increasing the number of franchise unit openings over the next several years to increase brand awareness.

As noted in our release, our fastest growing markets of Korea and China have accounted for nearly half of all international openings for the first nine months of 2005, and we have contractual agreements for over 500 additional units to be developed in these two countries over the next nine years.

Back in September, John Schnatter and I visited both countries and saw firsthand both the tremendous opportunity we have and restaurants operating at the very highest levels. As I said previously, our international business is a fabulous opportunity for us, and we intend to take full advantage of it. In the short term, and I stress short term, our focus will be on building the UK, Mexico, India, Korea, and China markets but expect other countries to be added to this priority list.

We've made tremendous progress given the very short time we've been engaged internationally. However, we believe we have numerous opportunities to increase our rate of international development and are very committed to doing so. We expect to invest heavily in the necessary resources, an aspect to be people and systems infrastructures over the next several years to support a faster paced international development in subsequent years. So, as you saw in the third quarter, you should expect the financial results of our international business unit to continue to be relatively insignificant for the next two to three years while we focus on investing for the future.

One final note before we open up the call to questions. The Compensation Committee and our Board of Directors have done an outstanding job designing an implementing Executive Compensation Programs that very effectively align management's incentives with the best interests of shareholders. Earlier this year, we established stock ownership requirements for our management team. A good example is myself, as I'm required within five years to hold five times my annual salary in stock or stock equivalents. We also introduced a Performance Unit Program at the beginning of 2005.

As David noted in his remarks, this program will make cash payments to management at the end of 2007 based upon Papa John's total shareholder return. That's measured by the stock price increase plus dividends paid, and that's compared to the performance of a peer group of restaurant companies. So although as noted in our earnings release, this program may add some volatility to quarterly results due to the required accounting methodology, ultimately, management only gets rewarded in proportion to how Papa John's shareholders get rewarded based on a three-year performance period.

So, let me put this in simple English. The two key measures of absolute stock price and relative stock price performance have both done extremely well this year. The stock price has risen from $33.95 at the beginning of the year to 48.39 at the end of the third quarter, creating over 240 million in shareholder value thus far this year and ranking us number two out of a peer group of 34 publicly held restaurant companies. You could call this the good news/bad news scenario in that the increased stock performance creates additional expense in the P&L, but the results of the program in my view is one that meets the very high standards of corporate governance. In many ways, the shareholder focused approach of this program is similar to the lead that Papa John's took back in 2001 by choosing then to expend stock options.

In conclusion, I've now been on board for a total of nine months, and I believe we've made enormous progress. Much more is still ahead of us, and I believe we have the leadership team capable of taking advantage of the opportunities we have. What is even more pleasing is the franchisees left our franchise conference five years ago full of enthusiasm and renewed confidence. I believe this confidence will quickly turn into increased store growth. I'd now like to turn the call back to David for Q&A. David.

Thank you, Nigel. We'd like to open it up now for Q&A, Deshanta, please.

(Operator Instructions). Your first question comes from Barry Stouffer with BB&T Capital Market.

Can you hear me okay?

Yes. Yes. Good morning, Barry.

Can you comment as to what's happening with hourly wage rates in the third quarter?

Barry, the wage rates in third quarter, although we've had a couple of states that had their own minimum wage go in, like Florida, we have not seen any substantial increases in our overall hourly wage rates.

Okay. And can you share with us what's your -- for your corporate restaurants what percent of sales utility cost ran in the third quarter and also packaging?

What was the second item, Barry?

Packaging.

Packaging. The utility costs -- hold on a second. Utilities were about 2.5%, just a little under 2.5%

There's electrical probably 1.5 and natural gas about 1?

That's probably about right.

Okay. And if you look at the second and third quarter results, you had -- the way at least you report them on your income statement, very strong results for corporate restaurants, but the P&L impact was offset by big increases in incentive compensation. Is that the same? Should we expect that next year as well if the corporate stores continue to perform as they have the last several quarters?

I think -- I'll start out, Barry, on that. I think, certainly, we expect very strong performance to continue from our corporate stores and what will happen - what happened this year is that in 2004, there were essentially very little management bonuses paid, so anything that happens with our strong performance in '05 is basically 100% increase over the prior year. Obviously, in 2006, even with strong performance, that won't be the case, so we would expect to get leverage in 2006 from that increased corporate store performance that we weren't able to see in 2005 because of going over those 2004 results, if that makes sense.

Okay.

And, Barry, I'd also add that obviously, for 2006, we would rebase our compensation programs so that the comparisons year on year should appear more positive.

Okay. And the new pan pizza product, how is the pricing of that affecting comps the last four weeks or so?

Barry, let me answer that. Basically, the price we've set at 12.99, which is an introductory price, and we think that's a very competitive price given the value of the product, and I stress it's an introductory price, so even though we don't fix the price on a normal basis for our franchisees, my expectation will be the normal price will be higher than that. Obviously, we think that's a great value at 12.99.

And one thing we're taking into account in our future plan is that given the very strong start that that product has had and the value that consumers believe both in the pricing and the actual quality of the product, we're trying to encourage people to continue that value orientation, but it doesn't mean that that price will continue going forward. Clearly, because that's like $1 ahead of some of our other limited time offers that's had a little bit of impact on our ticket average, but I think one of the important messages after this call is both late October and early November, we're seeing transactions increase on both the company side and the franchise side, and I think a lot of is down to the perceived value of that pan pizza.

Okay. And last question. Why should we categorize the extra marketing in the fourth quarter as a charge rather than just increased advertising?

The primary reason is it is benefiting the entire system. Rather than when you look at our P&L, the marketing cost that's in corporate restaurants would normally be just the contributions that we make on behalf of our corporate stores into the whole fund, we're basically making a contribution for the benefit of the entire system.

But you benefit directly from the royalties on higher same source sales at franchise units.

There would be some benefit. Yes, that's correct.

Okay. That's all I have. Thank you.

Barry, John Schnatter. I think Nigel's being a little bit modest. We put in a program to incent and to pay our management team well, and I think that's paying off. Also, Nigel got ahead of the game on the drivers on the $0.25 -- on the delivery cost and passed the majority of that money in to make sure that we have that covered and we didn't lose good people there.

If you look at Nigel's track record, it's outstanding on not only building the top line but also building the bottom line, and I think Q3 was the first effort to build the top line, and he's inherited some things that I did previously to build the long-term brand and I think will pay off in the future as soon as he can get his arms around the business.

Thank you.

Your next question comes from Mark Smith with Sidoti & Company.

Hi guys. Just a quick question. Can you give me any insight into CapEx for the fourth quarter and also going forward into '06, what we might be looking for CapEx spending?

I'll start out, Mark. We really haven't revised the full year guidance for cap ex of 18 to 20 million for this year. Through three quarters, we were only at about 10 million, so that might indicate that we would expect some level of increase in fourth quarter, and then maybe I'll turn it over to Nigel to talk more about some of our outlook for '06. Although we won't give specific guidance on that until a little later, I think he can talk in general terms.

Yes. Well, good morning. I think as we go into next year, we obviously have lots of opportunities as I keep saying, and with the tremendous cash flow, and if you look at our cash flow for this particular quarter, it was up 40 million, that's a fabulous number. What we need to do is clearly invest to grow the business.

I've said previously, we'll build more company store, and the Philadelphia example I talked about is one indication of that, and we also may invest in our international business, I think I've said that publicly before. So we're still working out our guidance for next year, but certainly in conferences we've said that we expect the capital number for next year to be at least double the guidance we gave last December for 2005. So expect us to start reinvesting into the business. We feel we've got lots of great opportunities that we need to take advantage of.

Are we closer to hearing anything on any strategic changes with Perfect Pizza in the UK?

Obviously, I don't want to tempt fate, so I think every day we get closer to hearing something. We have plans that we're working on. They're not plans that we want to reveal. As I've said in previous calls, our aim is to grow the Papa John's brand in the UK. I think we have plans to enable us to do that. The UK receives a lot of focus, but we remain very excited about the opportunity in the UK, so I would like to think that fairly shortly, but I won't define what that means. Fairly shortly, we'll be able to give you some more information on what's happening there.

Alright. Great. Thank you.

Your next question comes from Charles Timmell (ph) with UBS.

This question is for John Schnatter. Good morning. John, as founder and shareholder is something that you - a position you've always made very clear. You had a vision that you announced beginning of this year as your role changed to Executive CEO and I was just wondering nine months later, what that vision looks like, has it changed and what is your view going forward?

Charlie, I haven't been this excited about the business probably since '97 or '98. ifIf I had one word to describe what Nigel and the leadership team have been able to do at Papa John's, it would have to be exceptional. His interaction with the board is exceptional -- he has their full support. The interaction with the franchisees is exceptional. They're more excited about their business than they've been for some time. And the leadership team is just - they were doing great under my watch and I think they're just exceptional right now, we haven't lost one person since Nigel's come aboard, I think we've had several promotions and I think that's just a testament to Nigel's ability to come in and say, "Okay, here's the foundation, here's what I have to work with, and how do I make it better without throwing the baby out with the bathwater?"

So I -- I think the stock's at an all time high. Morale is at an all time high. And my biggest issues isissue is how do I get out of the way and let everybody do their job. With that being said, Nigel and I do meet weekly, he treats me with total respect and he always asks my opinion on issues, and so it's just been an exciting nine months and we feel good about our business and it's fun to be in this new role and watch this team build on the last four years of hard work.

Thank you.

Your next question comes from Mark Tolinowski(ph) of Buckingham Research.

Hi. Just wanted to ask about possible future market share trends. Looks like the pizza category'scategories had a very solid 2005. How do you think the sector does as an encore in 2006. Also, just curious what you're seeing for this sector in terms of the interaction between pizza delivery, take out pizza and sit down pizza. Thanks.

Mark, some complex questions there, I'll try and go through them. First in terms of - let's talk about the industry. I think one the things I've been impressed since I've rejoined the food business is the professionalism of us and certainly our three major competitors but I wouldn't ignore the independents out there. I think the sector really does a terrific job and certainly our immediate competitors, I think they've had outstanding years and I compliment them on that. So, I think when you've got professionalism leading the industry, the industry will continue to move forward.

I mean this is a very big category - over 30 billion -- and I think having three great companies, or perhaps I should say four great companies driving the sector forward, that's very encouraging. I think what the sector's managed to do this year is have a mixture of companies focused on value and companies focused on variety. We believe, because of our leadership and food quality, that variety is the area that we want to focus on and we've done that. We've reemphasized and will continue to reemphasize the quality. And I think that's now reflected in our market share.

If you look at Q3, we had the 3.9% comps, that was higher than our two immediate competitors and that was in a quarter where traffic was down by 3% according to industry numbers. So we drove our traffic up, we drove our comps up so we must have gained market share and I think on the back up pan pizza, which now gives us that important third leg, I think we will continue to move it forward.

In terms of the trends early in November, looking against the industry. Those trends - we're beginning to enhance our lead based on the latest numbers I've seen, so we're very encouraged by market share. How does the category actually sustain itself going forward? Well, one of the great things with pizza, it is a base that you can do a lot of things on and I think our competitors as long with ourselves will continue to find innovative ways to take the count of the crust. I think we've managed to improve our business by our strength in online. We see other opportunities for enhancing our delivery capabilities and other ways of contacting with our customers, so that will boost our business and I'm sure our competition will continue to do that.

So I'd be very bullish about the future for the category. I actually think the perceived higher oil - I'm sorry, fuel prices will also help the category because people will stay at home and I think that will have an impact, as I believe you've written up in some of your reports on other sectors like casual dining. I think people see both take out and delivery as a very convenient option. I think all four major companies in our sector do an outstanding job on the delivery side and the take out side and that convenience I think will continue to drive a very strong pizza category.

Thank you.

(Operator Instructions). Your next question comes from Mike Smith with Oppenheimer Fund.

Good morning. Oppenheimer and Company, actually, but internationally, is most of your growth going to be company owned or is it going to be franchised?

Mike, Good morning. I think internationally it'll be predominantly franchised and despite my very strong focus on driving the number of company stores we have northward, predominantly Papa John's is a franchise business and as far as I can see, always will be. We do see opportunities to invest internationally that we're assessing at the present time. We're excited about, if you like, the holes in the world where we don't have a strong presence. We're focused very much on those five countries that I mentioned earlier and we have ideas for each country that we're going to capitalize on. That will take some company investment but at the end of the day we'll be predominantly franchised. So a short answer will be franchised much more than company but expect some international investment.

The other question I had concerns the national - your contributions to the national marketing fund. Would we be incorrect to imply that there's some reluctance on the franchisees to keep up on the marketing pace with the corporate.

Absolutely not. We went to the franchisees in the middle of the year - Bill, I think it was probably July.

Yes.

And we said, the pan pizza launch was going to be the most important launch in our history, obviously since the company was founded by John, and we wanted to make this launch exceptionally strong. We felt that we needed another flight that was missing from this year's calendar. Our franchisees understandably budget both annually and by quarter and for them to suddenly find the funds to produce 1.7 million, which is the number we felt was needed to give us another two-week burst of TV advertising, I think was unreasonable, so we felt we had to set the lead, we had to make this launch - we had to make this launch to be outstanding. I think we've had a terrific marketing campaign, we've had a terrific PR campaign.

Operationally we've executed absolutely brilliantly and I've - I look back on that investment, and in fact, Mike, that investment is taking place this week and next week, that's the additional spend. I think we will look back at the end of period 11, November, and -- at the end of the year and say that was a terrific investment for our franchisees, for the company and our shareholders.

And Mike, it's Bill Van Epps. We also had the system vote to increase their marketing spend from 2.25 to 2.6 and that will start in '06 and I think the franchisee attitude is they're prepared to step up their marketing spend along side us.

I guess I have two other questions. One, in terms of franchisee developments, in terms of new stores, what are you anticipating for '06. And my last question is a question for David, because, did you say the delivery charge is actually increasing sales?

Okay, let's take the franchise development question first. Mike, firstly, as I said, our franchisees based on what we saw at our operations conference a few weeks ago, and based on what John said to you are, I think, in very good spirit and they're delighted with the comps and that confidence will, in my view, translate to more growth next year. I've - if I look at my time, when I first came here I learned the business, I then spent an awful lot of time on marketing. I'm now spending the majority of my time on development.

We're looking at where certain franchisees are being positioned, how we can stimulate growth. The Philadelphia model is an example of that and when we release guidance in December, I think you will see a clear improvement year on year in terms of the number of units that we're going to open in 2006. That number's not yet firm, that's why I cant give it to you, but we're very confident that that will be a clear improvement year on year. David, you want to take the other question?

Yes. Mike, on the delivery charge, back when we first implemented it in the corporate stores, we said that if all of that delivery charge represented pricing increase it would increase comparable sales, obviously, as a price increase. What we've seen is actually something that we view very favorably and that is we're using the delivery charge to be more flexible in how we promote and bundle our pricing and it's actually driving transactions. So when we look at the comp sales increase for example for third quarter and on into period 10 for corporate stores, the majority, even though we don't give specific numbers, the vast majority of that comp sales increase is traffic and not just pricing. Whereas if it were just the delivery charge, it would all show up in pricing. So we're actually very encouraged by that fact.

Well thanks. And John won the bet.

John won the bet.

Yes, for those of you on the call, Mike and I had a bet when he shortened the stock at 20 above that it'd hit 44 so you got to come to Louisville, Mike, and buy me that steak dinner.

I know.

All right.

Thanks Mike.

At this time there are no further questions, Mr. Flanery are there any closing remarks?

No Deshanta, thank you very much and thanks to everyone. Bye.

Thank you. This concludes today's conference call. You may now disconnect.